The relatively high cost of drugs is a growing concern for suppliers, health care providers, patients and insurance companies. Health care providers, such as hospitals, seek to provide the drugs they require at the lowest cost. Hospitals often serve as the intermediary sellers between drug manufacturing companies and hospital patients who may be considered the ultimate consumers. Hospitals are able to obtain lower prices from the drug manufacturers by purchasing in bulk. Drug manufacturers competing for the business often offer discounts based on purchasing amounts and relative use of their products. For example, a drug company might provide a 15% discount on a certain drug to treat a particular condition, as long as this drug comprises 75% of the total amount of drugs that the hospital uses to treat that condition (i.e., equivalent drugs). The contract terms can be relatively complex, making comparisons of purchasing scenarios difficult.
Consider the following example. Drug manufacturer ‘A’ offers drug ‘X’ at various prices for various different dosage quantities e.g., $7 for a 500 mg dose and $13 for a 1 g dose. Drug ‘X’ treats anemia, and drug manufacturer ‘A’ offers a 20% discount if a hospital purchases at least 60% of its anemia drugs from drug manufacturer ‘A.’ However, if a hospital purchases at least 80% of its anemia drugs from drug manufacturer ‘A’, the hospital is entitled to a 15% discount on all drugs purchased from drug manufacturer ‘A’ (not only drug ‘X’), and will receive an additional rebate of 10% on all drug ‘X’ purchases. At the same time, drug manufacturer ‘B’ offers drug ‘Y,’ also an anemia drug, and is in competition with drug manufacturer ‘A.’ Drug manufacturer ‘B’ offers drug ‘Y’ at various prices for various different dosage quantities e.g., $5 for a 500 mg dose and $9 for a 1 g dose. Drug manufacturer ‘B’ offers a 15% discount if a hospital purchases at least 30% of its anemia drugs from drug manufacturer ‘B.’ However, if a hospital purchases at least 40% of its anemia drugs from drug manufacturer ‘B’, the hospital is entitled to a 20% discount on drug ‘Y,’ and will receive an additional rebate of 15% on all drug ‘Y’ purchases.
Hospitals must examine many variables in order to properly consider these offers and make the best purchasing decision. Hospitals normally examine the discounts and rebates, as well as other consequences of contracting with a drug manufacturer, and of failing to meet the requirements which make the hospital eligible for other discounts and rebates.
The complexity of a hospital's purchasing decisions is apparent, even from this simplified example. At present, hospitals employ a series of ad hoc spreadsheets in determining their drug purchases. These spreadsheets evaluate offers from drug manufacturers based on units purchased. They are cumbersome to use, because of the continually changing contract terms offered, such as changing discounts and rebates. Also, basing purchasing decisions on units purchased does not take into account how the drugs are actually used. For example, a 500 mg dose of drug ‘X’ may be therapeutically equivalent to a 1 mg dose of drug ‘Y.’ Hence, it would be misleading to compare the number of units of 500 mg of drug ‘X’ purchased to the number of units of 500 mg of drug ‘Y’ purchased, because twice as many units of drug ‘Y’ are needed to achieve the same therapeutic result. A calculation that compares total costs of purchase of drug ‘X’ and drug ‘Y’ based on the number of units purchased therefore does not provide the most accurate comparison.